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Amazon looks to widen lead in cloud computing

To widen its lead in the cloud computing market, Amazon.com is working to make its Web services compelling to more customers as computing giants such as Microsoft and IBM attack the same territory.

On Apr. 28, Amazon announced the opening of a new data center in Singapore to give customers in Asia, India, and Australia speedier access to its Amazon Web Services business. That business lets companies buy from Amazon, on an hourly basis, computing power that's delivered over the Internet. The Singapore data center will target Asian customers and Western companies that have many users in the region.

In coming weeks, Amazon plans to introduce simplified management software for more of its 16 cloud computing products. "Amazon Web Services wants to be the data center for the world," says James Staten, a principal analyst at Forrester Research.

Amazon has established a booming business selling cloud computing services including processing, disk storage, and database software to what it says are hundreds of thousands of users, at hourly fees based on how much computing power they consume. "Amazon Web Services can be as big as our retail business, in the fullness of time," says Andy Jassy, the senior vice-president in charge of Amazon's cloud computing business, sitting in the converted Seattle hospital that's long served as Amazon's headquarters. Jassy joined Amazon in 1997 after Harvard Business School and has held a variety of jobs in the company, including as CEO Jeff Bezos' technical assistant. He launched Amazon Web Services in 2006, and has turned it into an unlikely success.

"Lot of momentum"

It could take years for Amazon's cloud business to rival the size of its retail sales, executives admit. Amazon won't break out the unit's sales. Citigroup estimates cloud computing services could generate about $650 million in sales for Amazon this year, or about 2% of its total. "There's no doubt it's got a lot of momentum," says Mark Mahaney, an analyst at Citigroup. He has a buy rating on Amazon shares.

In a February report, Goldman Sachs said that 77% of companies it surveyed using cloud computing development tools were using Amazon's Elastic Compute Cloud service. About 17% were using software from Google and Salesforce.com, and 10% chose Microsoft's Windows Azure. Amazon has been "running the table," says Tim O'Brien, senior director of platform strategy at Microsoft.

Businesses are rethinking how they manage computing. Given the falling costs of transferring data over the Internet and companies' realization that managing complicated hardware and software building blocks is often a losing proposition, many are willing to outsource some of the job. In fact, some venture capital firms "have made it almost a precondition of investing in (startups)" that they use Amazon's cloud software, says Citigroup's Mahaney. The cloud can lead to sizable savings. InstaColl, a Bangalore (India)-based company that sells online productivity software, was able to save more than 60% on the cost of running the computing, storage, and networking behind its applications by using Amazon Web Services instead of having its own hardware, CEO Sumanth Raghavendra said. He said InstaColl's savings are higher than most companies would reap.

Large clients

Beyond small startups, Amazon counts larger organizations including Eli Lilly, Pfizer, NASA, Adobe Systems, and Netflix as cloud computing customers. On Mar. 23, it released a software development kit so Java developers could more easily write applications that take advantage of its computing services. An Apr. 15 deal with NetSuite lets customers of the online accounting software firm store their data on Amazon's computers.

Amazon.com has always thought big. Since its founding 15 years ago, the Seattle-based company has grown to an expected $33 billion in 2010 sales and has a market value of more than $62 billion. Along the way, there have been detours. Bezos has dabbled in search engines and tablet computers, and Amazon operates an online grocery that's limited to Seattle.

Many of the company's side projects haven't panned out. A six-year-old search engine, A9, hasn't captured Web users' attention, and searches on Amazon sites have less than 1% market share, according to ComScore. The Kindle e-book reader is being challenged by Apple's iPad. And as consumers shift to downloadable books, music, and movies, Amazon's pack-and-ship retail model is feeling pressure. The company on Apr. 22 forecast second-quarter earnings that missed analysts' estimates.

Rivals gather

Moreover, Amazon's competitors are ramping up their own cloud computing operations. Microsoft has attracted customers including 3M and the Associated Press to Windows Azure, its software for building applications that run in Microsoft-operated data centers. Azure will also let developers write applications for Windows-powered smartphones, says Microsoft General Manager Doug Hauger. "It is now core to the work we're doing," he says.

IBM is also using cloud computing to try to become nimbler and more appealing to startups, which often eschew its pricey and complex software. On Mar. 16, it announced versions of its developer tools, middleware, and database software that programmers can access over the Web to build applications. They're designed to appeal to startups that often don't consider buying traditional business software. "If you don't have a cloud-based model for your software, then you just can't play with those companies," says Dave Mitchell, IBM's director of strategy and emerging business.

Other deep-pocketed tech companies are building cloud platforms as well. Google runs a cloud product called App Engine, and has shown a willingness to invest when it wants to branch into areas ancillary to search. VMware is also marketing its data center software for companies that want to build computing "clouds" themselves. "This is going to be an extremely crowded market," says Scott Crenshaw, a vice-president at Linux vendor Red Hat. "It's going to expand before it contracts."

Amazon has several advantages over its competitors. Its cloud computing engineers haven't had to satisfy requirements of large customers, so they've been free to make decisions that emphasize new technology and low costs, says Marten Mickos, CEO of software company Eucalyptus Systems and a former executive at MySQL and Sun Microsystems.

Trending Amazon's way

Adam Selipsky, a vice-president of product management and developer relations at Amazon, says the company learned how to run data centers inexpensively and at a large scale as a result of building its retail business. Many companies will pare back their data center operations in the next decade or two, turning the computing business into one of higher volumes and lower profit margins—a scenario where Amazon excels, Selipsky says. "We're four years into a trend that's probably decades long," he says. Already, Amazon Web Services consumes more computing power than the company's retail business.

For Amazon, expanding geographically and into the IT departments of larger customers will be key as it tries to make the cloud a plank of its growth. With larger rivals aiming to swipe some of Amazon's momentum in this frontier of business computing, Amazon will need to press every advantage it can.

Ricadela is technology editor for Bloomberg Businessweek.com in San Francisco.